MARKET WATCH: Bin Laden's death brings down oil price

The value of the dollar surged and the price of oil fell immediately following an overnight announcement that terrorist chief Osama bin Laden was killed in a brief raid by US Navy SEALs on his hideout near a military academy in Pakistan.

Sam Fletcher
OGJ Senior Writer

HOUSTON, May 2 -- The value of the dollar surged and the price of oil fell immediately following an overnight announcement that terrorist chief Osama bin Laden was killed in a brief raid by US Navy SEALs on his hideout near a military academy in Pakistan.

The US Central Intelligent Agency identified bin Laden’s expensive custom-built hideaway, and a top Navy counter-terrorism team was dispatched by helicopter in a 40-minute raid that also killed three other men, one of whom was identified as one of bin Laden’s sons. Officials said bin Laden was shot fatally in the head as he and the others resisted. The raiders evacuated his body, which was positively identified by DNA tests before burial at sea.

US President Barack Obama announced bin Laden’s death, saying, “Justice has been done.” Analysts expect bin Laden’s death to lift Obama’s popularity among voters. Government officials said they expect terrorist reprisals.

Not surprisingly, the Hamas terrorist organization called bin Laden a “holy warrior” and condemned his killing. But many people in Israel and the US celebrated his death, including large crowds outside the White House and at Ground Zero of the Twin Towers attack in New York.

In Houston, analysts at Raymond James & Associates Inc. expect bin Laden’s death to have little effect on crude prices, which were declining in early trade May 2 while natural gas and the equity markets were on the rise. Bin Laden was not even “near the top” of the list of many geopolitical risks to oil supply, they said.

“While bin Laden's strident hatred of the Saudi royal family and other pro-western Arab regimes is well known, in the grand scheme of things it was a relatively minor destabilizing factor,” said Raymond James analysts. “Currently, what is unambiguously at the top of the list of oil market concerns is the tension between the Arab ‘street's’ demands for political and social reform and most Arab leaders' stubborn refusal to offer that reform. Bin Laden, and al Qaeda more broadly, are definitely not the cause of the Arab revolutions, and therefore bin Laden's death does not weaken the revolutionary fervor. If Libya's [Moammar] Gadhafi or [Syrian president Bashar al-Assad] were to depart the political scene, that would have significantly more relevance for the oil market than the bin Laden news.”

At Energy Security Analysis Inc., officials said, “The implications for the oil market are unclear. To the degree that [bin Laden’s death] weakens the terrorist threat in oil producing countries and underscores the effectiveness of US covert operations, we could see the dollar strengthen and commodities weaken. On the other hand, to the degree this event spawns a wave of poorly planned but destructive terrorist attacks, it could increase the risk premium in oil prices.” They added, “We believe bin Laden’s death is a significant blow to the global jihad of al Qaeda.”

At Chatham House, home of the Royal Institute of International Affairs in London, Maha Azzam, associate fellow of the Middle East and North Africa Program, noted, “Al Qaeda as an organization had been decimated and greatly weakened by the consistent onslaught by US counter-terrorism efforts. Plus, bin Laden’s death comes at a time when he had become increasingly sidelined in the Middle East. Nonetheless, he leaves a legacy of a loose network of fringe radicals intent on using terrorism with no objective other than to terrorize simply as a way of saying that they are there.”

Xenia Dormandy, senior fellow, US International Role at Chatham House, warned, “The threat to the US and the Western world has not changed. That will take a longer, generational, effort to change attitudes, values, and ideology, on the part of all sides. America, particularly Congress, needs to be careful not to roll back its attention and resources in this time of austerity, on continuing to meet this challenge.”

Market session
Energy prices continued rising Apr. 29 in the last trading sessions before bin Laden’s death, with crude prices above 2½-year highs in the New York market, prompting the head economist of the Paris-based International Energy Agency to warn high energy prices may disrupt economic recovery around the globe.

Meanwhile, Chevron Corp. said it will use North Sea Brent crude prices to calculate production-sharing contracts with host countries rather than the price of benchmark US light, sweet crudes on the New York Mercantile Exchange. Chevron said it’s making the switch because of the sharp price disparity between the two crudes.

Olivier Jakob at Petromatrix, Zug, Switzerland, noted “a strong week” through Apr. 29 for companies on Standard & Poor’s 500 Index, up 1.96%, “to make for a strong month (up 2.85%) and push the year-to-date up to 8.43%.” He said, “The NASDAQ gained 3.2% during the month and is now up 8.32% for the year. More importantly, the NASDAQ is now trading above the peaks of 2007, and on a rising trend it is at the highest level since the ‘dot.com’ bubble of 1999.”

Jakob said, “The necessity of doing [the US Federal Reserve System’s] quantitative easing [program] when the stock market is really at record highs (excluding financials) is something that remains for us hard to understand.” He said, “One of the problems is still that the rally in equity is done without much volume and the lack of volume is not providing any help to the financial sector.”

He said, “The stock market recovery of 2011 remains a story of the Atlantic basin while the emerging countries continue to trail the strength of the US or of the European powerhouses. If US equities have been rallying to all time highs since the launch of QE2, the Shanghai composite has been basically flat for the last 6 months as China continues to fight inflation.

Jakob added, “The dollar index continued its slide during the week and has now reached its lowest level since the first half of 2008. Of course, the heads of central banks continue to say that a low dollar has no influence on the price of oil, but the current correlations both on the short term and the long term say otherwise . . .”

Energy prices
The June contract for benchmark US light, sweet crudes temporarily traded above $114/bbl Apr. 29 in the regular NYMEX session, but closed at $113.93/bbl, up $1.07 for the day. The July contract gained $1.09 to $114.93/bbl. On the US spot market, WTI at Cushing, Okla., was up $1.07 to $113.93/bbl.

Heating oil for May delivery increased 2.42¢ to $3.26/gal on NYMEX. Reformulated blend stock for oxygenate blending for the same month rose 3.5¢ to $3.46/gal.

The June natural gas contract jumped 12.7¢ to $4.70/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated 6¢ to $4.50/MMbtu.

In London, the June IPE contract for North Sea Brent crude was up 87¢ to $$125.89/bbl. Gas oil for May dropped $4.75 to $1,033.50/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes lost 56¢ to $120.35/bbl. So far this year, OPEC’s basket price has averaged $105.28/bbl, vs. $77.45/bbl for all of 2010.

Contact Sam Fletcher at samf@ogjonline.com

More in Economics & Markets